The global banking, finance, and insurance institutions (BFSIs) sector is rigorously tapping into new revenue streams and capturing new customer segments. This is being done through digital technologies. One of these technological innovations is Application Programming Interfaces (APIs) which play a critical role in the digital banking space particularly.
Let’s explore how the financial services industry is utilizing APIs.
Understanding the concept of API: Types and benefits offered
APIs are a set of routines, protocols, and tools used in building software applications. An API specifies how software components should interact with one another. Moreover, it connects and shares data between different software systems and helps siloed data to be used across multiple applications.
In the fintech world, APIs are used for various purposes, such as:
- Facilitating payments
- Accessing banking data
- Integrating with financial institutions
- Providing real-time financial information
By standardizing how different financial systems interact with each other, fintech APIs enhance operational efficiency and open up possibilities of innovating financial services. A notable example would be digital wallets and real-time, automated fraud detection.
Acting as intermediaries between two applications, the workings of APIs are explained in the following steps:
Types of fintech and banking APIs
- Partner APIs: To solve problems for a specific set of third-party companies.
- Private APIs: Created within the bank to improve their operations.
- Open Banking APIs: The most prevalent APIs. They allow banks to share data with other companies.
Financial institutions are increasingly leveraging open banking APIs to share consumer data with applications and aggregators in a secure manner. According to McKinsey, in 2022, 75% of the top 100 banks made their APIs publicly available. This is primarily because open banking APIs enable users to link their bank accounts to various financial services and open up new ways of accessing data.
Use cases of APIs in fintech services include payment gateways such as Stripe, peer-to-peer lending marketplaces like LendingClub, digital wallets such as PayPal, as well as crypto exchange platforms like Coinbase.
Benefits of APIs for banks and financial institutions (BFSIs)
Reduced costs
With a single API, banks, financial institutions, and insurance (BFSIs) companies can develop multiple embedded finance products and services. This saves the cost of creating various features and functionalities from scratch.
Regulatory compliance
APIs can automate compliance checks and data governance, including Know Your Customer (KYC). Moreover, APIs can assist in complying with regulatory requirements by providing data access to government agencies and regulators. Examples of these regulatory requirements include the General Data Protection Regulation (GDPR) and Payment Services Directive 2 (PSD2).
Enhanced customer experiences
By streamlining development and enabling the delivery of high-quality features to users, APIs enhance the customer experience while ensuring data compliance.
The importance of implementing security for fintech APIs
Without robust security measures in place, fintech APIs can be subject to several attacks. The most common ones are:
- DoS and DDoS attacks
- SQL injection attacks
- XML External Entity (XXE) attacks
- Cross-site request forgery and cross-site scripting attacks (CSRF and XSS)
- Man-in-the-middle (MITM) attacks
To protect against such API attacks, BFSIs can implement the following measures.
Using strong authentication and authorization
Effective authentication methods, such as multi-factor authentication (MFA), help verify the identities of users and systems interacting with APIs. Authorization mechanisms should be in place to control access levels and permissions, ensuring that only authorized entities can access specific resources.
Segregating your data
By organizing and isolating datasets to restrict unauthorized access, BFSIs can ensure that sensitive information is categorized. Also, access is granted only to those with the appropriate permissions, thus reducing the risk of data breaches.
Eliminating business logic vulnerabilities
Identify and eliminate vulnerabilities in the application’s business logic by thorough testing. This is done to check and address potential weaknesses attackers could exploit to manipulate the API, gain unauthorized access, or disrupt operations.
Creating security awareness among employees
Educating employees about security best practices, safeguarding credentials, and recognizing potential phishing attacks helps create a security-conscious culture.
Adding TLS/SSL for API communications
Implement Transport Layer Security (TLS) or Secure Sockets Layer (SSL) encryption to secure client communication and APIs. This cryptographic protocol keeps the transmitted data confidential and protected from eavesdropping.
Keeping a tested contingency plan
Regularly testing the organization’s contingency plan is essential. This helps ensure an effective response to security incidents, minimizing potential damage and downtime while restoring normal operations as quickly as possible.
APIs and fintech apps: The perfect combination to drive innovation
Adopting an API-first approach, especially in a rapidly evolving digital financial world, is imperative for agility, efficiency, and creating innovative business models centered around platforms.
However, success in building fintech applications requires a well-thought-out strategy, governance, flawless execution, and fraud prevention, which can be achieved by partnering with a technology solutions provider possessing expertise in the fintech domain.
VentureDive is one such provider with an extensive fintech portfolio, which renders us a suitable software development partner for creating digital financial solutions.